Com Com determines Orion’s customised price-quality path

The Commerce Commission has
determined Orion’s customised price-quality path for
2014-2019, which takes into account Orion’s circumstances
following the Canterbury earthquakes in 2010 and
2011.

In its final decision, the Commission has allowed
Orion to increase prices by up to 8.4 percent from 1 April
2014, which will result in an average increase of
approximately $4.80 per month to a typical household
customer. Further annual increases at CPI plus one percent
will be allowed until 2019. The quality standards require
the reliability of supply to gradually improve over the
period to 2019, towards pre-earthquake levels.

“This is
a good outcome for both Orion and its consumers”, said
Commerce Commission Deputy Chair Sue Begg. “The price path
provides a level of forecast expenditure that allows Orion
to invest in and operate its network for the long term
benefit of its consumers”, said Ms Begg.

These price
increases are lower than those Orion sought in its proposal
of 15 percent, or $8.50 per month to a typical household
customer, and CPI plus 1.2 percent increases up until
2019.

Orion’s proposal included a sum of $86.3 million
to compensate it for the effects of the Canterbury
earthquake prior to its new price-quality path being
implemented. The Commission has not allowed Orion any
compensation for lost revenue, but given the exceptional
circumstances has agreed to Orion recovering $34.8 million
in additional costs that it incurred following the
earthquakes.

“We have gone through a rigorous process to
assess Orion’s proposal”, said Ms Begg. “This has
included reviews by consultants with significant executive
and engineering experience in the electricity lines
industry.”

The customised price-quality path provides an
allowance for operating and capital expenditure over the
regulatory period. Although the allowance is less than Orion
proposed, it is significantly higher than Orion has spent in
the past.

“Now that the price-quality path is set, it is
over to Orion to decide how much it spends and what projects
it undertakes to manage its network. The amount Orion spends
will affect the returns it earns”, said Ms Begg. Ms Begg
noted that Orion has a financial incentive to achieve
efficiencies because it can earn higher returns by spending
less, but Orion must still meet the reliability limits the
Commission has set.

This determination takes effect for
Orion’s pricing for the year commencing 1 April 2014. The
Commission’s full report is available at www.comcom.govt.nz/orion-cpp

BackgroundOrion
New Zealand Limited operates one of the largest electricity
distribution networks in New Zealand, covering 8,000 square
kilometres and providing electricity lines services to
190,000 homes. It is owned by Christchurch City Council
(89.3%) and Selwyn District Council (10.7%).

In markets
where there is little or no competition, the Commerce
Commission regulates the price and quality of goods and
services to benefit consumers and build a more competitive
and productive economy. Non-exempt suppliers of electricity
lines services are subject to price-quality path regulation,
under Part 4 of the Commerce Act 1986, and are subject to
requirements to disclose information about their
performance.

Price-quality path regulation is designed to
mimic the effects seen in competitive markets so that
consumers benefit in the long term. This includes making
sure businesses have incentives to innovate and invest in
their infrastructure, and to deliver services efficiently
and reliably at a quality that consumers expect, while
limiting businesses’ ability to earn
excessiveprofits.

The Commerce
Commission received the proposal for a customised
price-quality path (CPP) from Orion on 20 February 2013.
This proposal is a result of Orion’s extraordinary
circumstances following the Canterbury earthquakes in 2010
and 2011.

The Commission announced its draft decision on
14 August 2013. All submissions, process papers, issues
papers and expert reports are published on the Commerce
Commission website.

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